Mondi’s box of delights
Mondi’s ambition to become a global packaging behemoth is taking shape. The SA company, which traces its roots to the late 1960s as a paper packaging mill in Durban, has struck an in-principle agreement on a proposed R120bn-plus tie-up with London-listed rival DS Smith. The move is not just about dominating the market; it is about shaping the future of sustainable packaging.
For shareholders of DS Smith, the deal is a windfall, offering an implied value of 373p a share, a 33% premium over its price on February 7 — the day before it said it had received an approach. That is generous by historical standards and reflects Mondi’s confidence in the industrial logic of the deal. For Mondi, this merger is a strategic play that promises to create a pan-European sustainable packaging leader worth more than R240bn.
The tie-up is expected to create a group with increased exposure to structural growth trends in sustainable packaging. With a complementary geographic footprint, the combined entity will be Europe’s top corrugated packaging player. The cost-saving overlaps of both companies’ strengths in the corrugated value chain bode well for the company to deliver value for shareholders and customers.
That said, this is not a done deal. Regulatory approval is a hurdle, and the completion of mutual due diligence is still pending. The European Commission, which regulates competition on that continent, and other authorities could demand divestments to address competition concerns. If the deal is not blocked altogether, both parties would be hoping any conditions attached to it would not undermine its strategic and commercial merits.
In addition, shareholders may demand a higher offer for DS Smith, which has a strong position in the growing market for sustainable packaging. Aside from the position in the market, shareholders would be within their rights to demand a higher offer because Mondi is offering about 16% less than DS Smith’s intrinsic value of 445.31p, according to Alpha Spread, a fundamental valuation analysis tool. Shares in the company were trading at about 339p, well below the offered price and typically a sign that investors are not confident that the deal will go through.
Moreover, Mondi’s offer could attract rival bidders. US-based International Paper could make another attempt to grow its European footprint after its bid for Smurfit Kappa, a FTSE 100 paper packaging company, was rejected in 2018. So could Sweden’s SCA, which has a similar focus on renewable materials.
Furthermore, Mondi’s shareholders would own 54% of the combined entity, while DS Smith investors would own the rest, a balance of power that would require careful navigation to ensure a smooth integration of the two companies.
The merger’s potential to deliver benefits to shareholders cannot be overstated. It is a bold move by Mondi, one that could redefine the industry and accelerate the shift towards more sustainable packaging. But it would need to fight hard to overcome the challenges and deliver the benefits of the deal.